US-China trade war could drag Vietnam GDP down

National flags of U.S. and China wave in front of an international hotel in Beijing February 4, 2010. Photo by Reuters/Jason Lee

Vietnam’s GDP could drop slightly as a result of the ongoing US-China trade war, a new report says.

The report, released Wednesday by the National Center for Socio-Economic Information and Forecast (NCIF), predicts a drop of 0.03 percent this year, 0.09 percent next year and 0.12 percent in 2020 and 2021.

This equals to a GDP drop of VND1.65 trillion ($71 million) this year and VND5.3 trillion ($228 million) next year. The decline will climax at VND8 trillion ($344 million) in 2021, says the NCIF, which functions under the Ministry of Planning and Investment.

This drop is “relatively low,” even at the climax in 2021, said Tran Toan Thang, head of NCIF’s Department of World Economic Issues.

While Vietnam’s exports will also decrease because of the negative impacts of the trade war, there will be negligible impact on foreign direct investment, Thang said.

He also expressed concern over the new U.S. tax law that lowers its business tax rate from 35 percent to 21 percent, he added.

The new law might make U.S. businesses reconsider their investment strategies to focus more on their home country instead of expanding in Vietnam, Thang said.

The tax deduction might also result in some countries creating more incentives to retain U.S. investments. China has recently said it would temporarily give U.S. firms tax exemptions to stop them from withdrawing from the country, Thang noted.

“This move will lower competitiveness of the investment environment in Vietnam,” he added.

Tension escalates

Trade tension between the U.S. and China continues to escalate. A Reuters report cited Beijing saying on Wednesday that it would slap additional tariffs of 25 percent on $16 billion worth of U.S. imports.

The announcement came after Washington said it would impose 25 percent tariffs on another $16 billion in Chinese goods after imposing tariffs on $34 billion last month.

So far, China has now either imposed or proposed tariffs on $110 billion of U.S. goods, representing the vast majority of its annual imports of American products.

Experts have previously cautioned that Vietnam will suffer collateral damagefrom this trade war.

When large corporations no longer see the attractiveness of developing countries, their capital will flow back to the big countries, said Pham Sy Thanh, a department head at the Vietnam Institute for Economic and Policy Research (VEPR).

For this reason, the abundance of labor will no longer be a perk for developing countries like Vietnam, Thanh told VnExpress.

Local economists are also concerned that the weakened Chinese yuan will result in a rush of low quality Chinese goods to Vietnam, including textiles, garments and wood products.

This is not just a trade war, but “a war on power, technology and currency policy between the world’s two largest economies,” Tran Tuan Anh, Minister of Industry and Trade said at a government meeting last month.